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BA 003-SPRING 2000 Punitive Budgets
 

BA 003-SPRING 2000 Punitive Budgets

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  • Its time to start the budget. Those words are enough to drive anxiety into the most laid-back manager. “Budget” is an emotionally packed word. It is best avoided. The term “financial plan” is more appropriate. After all, we don’t budget sales. We set a sales plan and then decide upon the resources necessary to achieve it. If you implement only one thing from today’s seminar, make that one thing the elimination of the term “budget”.
  • We are about to explore the linkages that make planning a unified activity. For several years I have referred to this activity as the complete planning process. Contemporary literature has labeled it--integrated planning.
  • Today’s corporate planning effort demands a coordinated approach. Perhaps it always has required this type of synergy but somehow it often did not materialize. It wasn’t very long ago that companies had separate strategic planning organizations responsible for critical thinking. The accounting department developed the financial budget. And employees were regimented by “personal” objectives imposed from “above”. It is no wonder that these plans lacked a common direction. The integrated approach to planning that we will discuss today links strategic, financial and individual planning. Strategic planning is the starting point. Driven by a series of practical tools, the financial plan transforms the strategies into a spending blueprint. Committed employees, empowered by participation in the company’s success, take this blueprint and turn it into action.
  • The final component of integrated corporate planning is the financial plan. This is the traditional budget process--updated for the new millenium and without the “B-word”. When integrated or linked with the strategic plan, the financial plan takes on a new dimension of reality. Developed by committed employees, the financial plan becomes a vehicle for making things happen. A firm needs the financial plan to be devoid of gamesmanship. This is not the time to view things as you want them to be but rather as they are.
  • Every good financial plan needs to possess F-A-T. It has to relate to the future. That means it has to get done before the next operating period begins. It also has to promote action. It cannot be an idle exercise. Lastly, it must be designed in the same format as routine reports. This facilitates plan versus actual comparisons.
  • Similar to the strategic plan, the CEO must drive the financial plan. Leadership begins at the top. A pro-active CEO can energize an entire firm. A complacent CEO, on the other hand, can be equally effective in turning an organization off to planning.
  • There will always be a debate over the best way to conduct a financial plan. Some support the top-down approach with its autocratic approach. Others support the more democratic bottoms-up style. Both methods have their strengths and their weaknesses.
  • Clearly the strength of the top-down approach is speed. Coupled with the fact that the mandated results are assured, this is a cost effective approach to financial planning. But speed has its risks. When control is exercised from above, resistance often follows. Employees, knowing that they have little or no input in a top-down plan, may simply chose to ignore it when they execute. They won’t own the numbers. Commitment can become non-existent.
  • The bottom-up approach, on the other hand, empowers the employee to take responsibility for execution. It does take longer. And, it might require some last minute global adjustments that often present some limited morale problems. However, these morale issues are generally less critical than those found in top-down planning.
  • Since quantitative results are so emotionally provocative, the people side of financial planning needs to be addressed in greater detail. Forced results are generally going to be unrealistic results. They lead to gamesmanship and abandonment of responsibility. If employees remain motivated and committed to the firm, incredible results can develop. Success is a tremendous behavioral driver.
  • The simplified 12-week plan schedule combines the top-down and bottom-up approaches to financial planning. The list is fairly self-explanatory; however, several steps require further discussion. These points will be examined in the next few pages. As mentioned earlier, it is essential that the entire effort is actively supported and led by the entity’s most senior operating official. Naturally finance plays a key role in the plan; however, top management must own the overall process.
  • The kick-off meeting sets the tone for the entire plan. In this meeting management presents the detailed schedule and sets attribution guidelines and spending assumptions. It is also a great opportunity to review the status of the strategic plan. Success in this event launches the plan in the correct direction.
  • The first traditional planning step is the creation of the sales plan. While the key players in this effort are usually sales, marketing and senior operating management, finance can play a significant role by ensuring that the parameters listed on the following page are considered in setting the revenue target.
  • The six items listed above are a starting point for revenue analysis. Most of the detailed work is done by the sales or marketing staff. It is finance’s role, however, to ensure that a thorough review takes place. It is key that customers are asked if, in fact, they are planning to buy. Similarly, the cross-elasticity of demand must be reviewed in light of new product introductions. Competitive reaction to your sales plan should also be considered. Simply stated, can your revenue plan withstand a strategic challenge from your competition?
  • Once the revenue target is set, the next step is the modification of the macro-scenario model to the plan period. The model that was developed in the strategic plan should be updated for project prioritization changes and other linkage adjustments. This model becomes the top-down element of the plan.
  • In addition to the updated macro-scenario and the spending input schedules (sample copies are shown in Appendix A), some additional planning assistance can be gained from auxiliary planning schedules.
  • In the baseline spending plan only committed outlays are presented. In other words, it shows how much would be spent in the absence of any discretionary amounts. It serves as an expense floor.
  • Some companies endorse zero-based spending methodologies. In this process, all expenditures are justified. It is obviously time consuming but can be beneficial if done sparingly. It is important to consider the people aspects of zero-based spending as well. If not linked to a value-added methodology, this approach can lead to confrontation.
  • Finally, another planning “adder” is the creation of a cost reduction goal resulting only from changes in how things are done. This effort is process driven. Any reductions in personnel needs are implemented in the form of reduced additions, rather than layoffs. Used appropriately, this last process can significantly limit the inflationary spiral of financial planning.
  • This final revenue compilation is simply an update of the preliminary sales number in a format that lends itself to detailed direct cost analysis. Some companies may have difficulty with a high degree of precision in this step. Accordingly, estimates of sales mix can be used. It is not the best approach but will suffice if nothing else is available.
  • The next 4-5 weeks are spent developing direct and indirect spending levels. In the last month of the financial planning cycle, this input comes together. Finance reviews the input and prepares an initial pass of the profit and loss plan. The initial pass is analyzed and formally presented to top management by the functional organizations. It is important that finance does not conduct each functional presentation. That is the responsibility of each independent function. Adjustments and revisions follow as necessary.
  • A final package is prepared before the start of the new fiscal year together with a complete set of financial statements. If the company is a manufacturing organization, a set of production cost data and operating metrics should be added to the package.
  • Finance must play both a lead and a supporting role in the financial planning production. As a lead player, it must compile the necessary documentation and produce relevant, actionable reports. In a supporting role, it must ensure that the plan is credible, realistic and complete. This dual responsibility is not easy. Finance must be both the doer and the subtle driver--the ultimate hammer and the velvet glove. One tool that is helpful in evaluating the results of the financial plan is economic value added analysis or EVA™. EVA™ is the trademark of the consulting firm of Stern, Stewart & Co. It compares the cost of capital with the income generated from that capital. An increase in a firm’s EVA™ is associated with an increase in that firm’s wealth. As a result, a good benchmark of a financial plan’s merit is whether or not its EVA™ has improved.
  • We all realize that financial planning is not management’s favorite process. It takes too long. Its outcome is often unrealistic. It is not used to manage the business. While these complaints are generally exaggerated, sometimes they are warranted due to the planning traps and risks listed above. People closest to the action develop the most effective financial plans. Do not let operating management delegate this task to the finance function. Finance can assist but they should not prepare the plan. Similarly, each functional area should analyze, critique and present its own plan. Measuring reality is a role in which finance excels. Finance excels because it does not get drawn into the subjectivity of an issue. It presents and analyzes with unimpassioned judgement the quantitative results. The quality of the financial plan is immeasurably weakened when finance loses this objectivity. Financial management cannot allow this to occur. Operating managers often need a velvet glove to nudge them through the rigors of a financial plan. Finance must provide the necessary catalyst with timely advice, alternative estimation suggestions and firm deadlines. Lastly, a truly effective financial plan requires some opportunities for contingencies.
  • Integrated planning is an exhaustive process. It requires on-going refinement. That is “yuck #1”. Moreover, it has to be converted to action for it to acquire any real meaning. It’s the conversion process that gives rise to “yuck #2”. Yuck #2 takes place when you look at your actual results in relationship to the plan and you say, “Yuck!” Somehow reality is not what you expected it to be. When trying to assess yuck #2, take all possible solutions into consideration. Look into revenue enhancing activities. Assess ways to improve productivity. And, relentlessly squeeze operational costs. Revise the plan only when a significant operating event occurs. This includes a major re-organization, an acquisition or a divestiture.

BA 003-SPRING 2000 Punitive Budgets BA 003-SPRING 2000 Punitive Budgets Presentation Transcript

  • Punitive Budgets
    • Budgets usually mean spending constraints
    • “Financial Plan” is more appropriate
      • Revenue goals
      • Spending support plan
    • Standard element of overall financial mgt.
  • Driving the Complete Planning Process
    • Also known as “Integrated Planning”
    • Defining the process
    • Timetable
    • The planning environment
    • Planning for Operating Results
  • The Integrated Planning Process SP $P MBO PARTICIPATION INTEGRATION COMMITMENT
  • Financial Planning: Setting the Scene
    • Emphasize Use as Management Tool
    • Focus on Reality
    • Focus on Teamwork
    • New Priorities Selected
    • Reinforce No Gamesmanship
    • Pump the Organization Up!
    • Eliminate the “B” Word
  • Remember the F.A.T. Factor
    • F uture in Direction
    • A ction in Orientation
    • T rackable in Design
  • Role of the CEO
    • Sets the Tone
    • Leads All Group Meetings
    • May Delegate but Not Abdicate
    • Supports Planning Urgency
    • Can Make or Break the Process
  • Top-down--Bottom-up Debate
    • Classic Delimma
    • Strength and Weaknesses: Both Ways
  • Top-down
    • Strengths
      • Speed
      • Assured Results
      • Cost Effective
    • Weaknesses
      • Gamesmanship
      • Loss of Morale
      • Loss of Commitment
      • Ineffective Decisions
      • Lack of Accountability
  • Bottom-up
    • Strengths
      • Participative
      • Creates Ownership
      • Creates Commitment
      • Fosters KTT
      • Better Decision Making
    • Weaknesses
      • Time Consuming
      • Possible TMT Override
      • Some Morale Issues
  • Soft Side of Financial Planning
    • People Issues
    • Forced Numbers = Unrealistic Results
    • Unrealistic Goals = Games
    • Poor Incentive Comp. Plans = Inaccurate and/or Ill-advised Action
    • Focus on Human Resource Value
    • Motivated Employees Create Incredible Results
    • Expect Baggage and Some Discontent
  • Simplified Plan Schedule
    • ACTION RESPONSIBILITY DUE DATE
    • 1. KICK OFF MEETING CEO, CFO, MGRS -12
    • 2. PRELIM SALES CEO, MKTG -11
    • 3. MACRO-SCENARIO CEO, CFO, STAFF -10
    • 4. PLAN PACKAGE FINANCE -9
    • -MACRO-SCENARIO
    • -BASELINE ANALYSIS
    • -ACTUALS
    • -SCHEDULES A, B & C
  • Simplified Plan Schedule-II
    • ACTION RESPONSIBILITY DUE DATE
    • 5. FINAL REVENUE CEO, MKTG -8
    • 6. MFG RESPONSE MFG -4
    • 7. INPUT #1 ALL -4
    • REVIEW #1 STAFF -4
    • 8. ITERATIONS #2-4 ALL -4 TO -1
    • FINAL REVIEW STAFF/BOARD -1
    • 9. PUBLICATION STAFF/FINANCE 0
  • Kick-off Meeting
    • CEO Driven
    • Corporate Tone Reinforced
    • M/S and Values Discussed
    • Key Issues and Strategies Reviewed
    • Integration Changes Discussed
    • Calendar Presented
    • Major Assumptions Discussed
    • Major Attribution Algorithms Discussed
  • Preliminary Sales
    • CEO-VP Sales/Marketing Driven
    • Negotiated Level of Achievement
    • Several Weeks in Process
    • Compiled from Multiple Sources
  • Revenue Consideration
    • Backlog
    • Direct Customer Contact
    • Strategic Plan
    • Product Development and Timing
    • Capacity
    • Historic Trends
    • Competitive Reaction
  • Macro-Scenario Model Financial Plan
    • ABC COMPANY
    • STRATEGIC PLAN MACRO-SCENARIO
    • FY 1996
    • Q196 Q296 Q396 Q496 1996
    • $ % $ % $ % $ % $ %
    • SALES 10 100 20 100 30 100 40 100 100 100
    • COGS 5 50 10 50 15 50 20 50 50 50
    • GM 5 50 10 50 15 50 20 50 50 50
    • R & D 1 10 2 10 3 10 4 10 10 10
    • SALES 2 15 3 15 4 15 6 15 15 15
    • G & A 1 5 1 5 1 5 2 5 5 5
    • OP. EXPS 4 30 6 30 8 30 12 30 30 30
    • PRE-TAX 1 20 4 20 7 20 8 20 20 20
  • Some Financial Planning “Adders”
    • Baseline Spending
    • Zero-Based Spending
    • Productivity Improvement Plans
  • Baseline Spending Plan
    • Comparison with Last Year’s Spending
    • Only Salary Changes Allowed
    • No Change in Discretionary Spending
    • One Time Items Eliminated
    • No New Headcount or Capital Equipment
  • Zero-based Spending
    • Authorized $ Reset to Zero
    • Each Expenditure is Justified
    • Recommended Every 4-5 Years
    • Time Consuming
    • Potentially Confrontational
  • Productivity Improvement Plans
    • Makes Planning a Value-added Activity
    • Leads to Control or Reduction in Spending with Same or Higher Output
    • Includes Operational Guidelines
    • Eliminates Built-in Inflation
  • Final Revenue and Manufacturing Response
    • Preliminary Sales in Direct Cost Detail
    • Will Vary by Company
    • Completion Should Provide for 4 Weeks Production Analysis
  • Interim Review
    • Chaired by CEO
    • Functional VP Driven
    • CEO and CFO Compile Action Items and Summarize
    • Open to Financial/Operational Trade-offs
    • Interative and Inter-active
  • Financial Plan Package Content
    • Narrative
    • P & L
    • Balance Sheet
    • Cash Flow Statement (Receipts and Disb.)
    • Headcount
    • Department Expenses
    • Capital Asset Analysis
  • Role of Financial Executive
    • Leadership
    • Innovation
    • Experimentation
    • Analysis
    • Compilation
    • Reality Check
      • EVA analysis
    • Catalyst
  • Planning Traps and Risks
    • Operations Abandonment
    • Poor Assumptions and Allocations
    • Lack of Reality
    • Analysis Paralysis
    • No Contingencies
  • Bringing the Plan to Life: Monitor and Adjust
    • Yuck #2
    • Sales Opportunities
    • Cost Opportunities
    • Productivity Opportunities
    • When To Revise
  • Modified MNC Planning
    • Complete HQ Strategic Plan
    • Complete Subs. Strategic Plan (1-3)
      • Situational Analysis & Subs. SWOT
    • Complete Subs. Financial Plan (4)
    • Collect Data (Monitor) (5)
    • Adjust (6)
  • Effective Mgt. Control
    • Goal Congruence
    • Communication of Plans
    • Communication of Results
    • Communication of Feedback